MSWG "puzzled" about Can One deal

From "The Observer" MSWG's newsletter dated May 22, 2015:

Can-One had on 13 June 2014 entered into a conditional share sale agreement with Teh Khoy Gen for the proposed acquisition by Can-One of 3,000,000 ordinary shares of RM1.00 each in F & B Nutrition Sdn Bhd (F&B) representing the remaining 20% of the issued and paid-up share capital of F&B not already owned by Can-One at a purchase consideration of RM112,900,000 to be satisfied entirely via the issuance of 39,753,000 new ordinary shares in Can-One (Can-One Share(s)) representing approximately 20.69% of the enlarged issued and paid-up share capital of Can-One at an issue price of RM2.84 per Can-One Share which represents a premium of approximately 10% over the 5-day volume weighted average market price of can-one share up to and including 12 June 2014 (Proposed Acquisition)


The Board of Can-One further announced that Bursa Malaysia had vide its letter dated 20 April 2015 (which was received on 21 April 2015) approved the listing and quotation of 39,753,000 new Can-One Shares to be issued at an issue price of RM2.84 per Can-One Share as the purchase consideration pursuant to the Proposed Acquisition.

[Source: Can-One’s announcements on Bursa Malaysia’s website on 14 June 2014, 21 April 2015 and 8 May 2015]

MSWG’S COMMENTS:
MSWG was puzzled at this deal as Can-One is acquiring from Mr. Teh Khoy Gen, the remaining 20% equity stake in a subsidiary (F&B), which it already owns 80% stake while the remaining 20% is owned by Mr. Teh and how this could result in Mr. Teh emerging as a new shareholder in Can-One with a 20.69% equity stake (from a 20% equity stake in the subsidiary of Can-One).

Thus we need further clarification as it does not appear to add up. This is on account of the following:
(ii)        This subsidiary, F&B, makes up only about 56% of Can-One Group’s EBITDA.
(iii)       There are other subsidiaries and associates such as Kian Joo which contributed the remaining 44% of Can-One Group’s EBITDA.
(iii)       Can-One is valuing its shares at a 17% discount to its net assets, whereby F&B is valuing it at 4.86 times its book value.
(iv)       Can-One’s issue price for its shares only represents 6.21 times of price-to-earnings ratio (PER), whereas the PER of F&B is 15 times. F&B is an unlisted entity and yet it is accorded a PER which is much higher.

Based on the above, we, thus, require further explanations at the coming EGM.


I agree, and I like to add the following illustration from page 28 of the circular:

Can One will acquire 20% of F&B, so the PAT of Can One will increase (the blue box), that is good.

However, existing shareholders of Can One will get diluted (the red box), that is bad.

Unfortunately, the dilution is much larger than the added earnings, and thus existing shareholders will receive 12% less profit than before the deal.

The deal thus looks clearly bad for existing shareholders, and it is indeed puzzling why the board of directors of Can One supports the current deal.

Three reasons are given:

• the increased earnings, but on a per share basis that doesn't work, as explained above; also the PE of (unlisted) F&B is compared to the PE of listed company, which is really not fair, unlisted companies trade at much lower valuations than listed companies
• about the outlook for F&B (but Can One owns already 80%)
• lastly a rather curious statement:

First of all, that is three times the word "may", so rather speculative.

Secondly, assuming that there is a genuine buyer, in most contracts (or according to the articles of association) the seller has to offer the shares first to the current shareholders (Can One) under the "Right of First Refusal" rule, so Can One can still decide to buy the shares when that moment arrives.

Thirdly, assuming indeed an outside party buys the 20%, requests and gets a board seat and starts to expose the "secrets". Well, that is plainly against the rules, a director has to act in the best interest of the company, so time to call in the cops.

In other words, all arguments given are rather weak.

Kian Joo Can and Can One (2)

More news about Kian Joo, about which company I wrote before.

The company made a 6-page announcement to Bursa Malaysia, describing the history of the offer from Toyota Tsusho Corporation (TTC). The offer is only a Letter Of Intent (LOI), and seems not that concrete.

Of interest is further the following:

That statement was made on April 15, 2014, but until now the company has not yet received any subsequent writing with details regarding the alleged conflict of interest or the acting in concert situations.

Kian Joo Can and Can One

A long time ago (around 20 years ago) I bought some shares in Kian Joo Can Factory, good company, well run, focused, paid a decent dividend, strong balance sheet, etc. I must have sold the shares some time later, and then later the family troubles started. That is never good for business, is my experience, these troubles can be quite emotional, which might not be the best state of mind to take rational business decisions.

I often lamented two issues regarding take-over offers in Malaysia:

• There is hardly ever a dissenting voice from any Director on the Board;
• There is hardly ever a competing offer.

In Kian Joo's case, Christmas came early, since both these issues did apply, very rare for the Malaysian corporate scene:

• There was a competing offer by Toyota Tsusho Corporation; 
• One Director opposed the proposed disposal, in light of this competing offer.

The announcement can be found here:


"Kian Joo wishes to announce that Dato’ Anthony See Teow Guan (“Dato’ Anthony See”) has declared that he is now against the Proposed Disposal. Dato’ Anthony See’s reason for the change of decision is in light of the letter of interest that was received from Toyota Tsusho Corporation."


It is rather puzzling why Kian Joo not simply stated the reasons for Anthony See's stand. Surely, from a CG point of view, it is best to be transparent and publish the reasons as soon as they are available?

Yesterday Kian Joo's AGM was held, these are the results of the voting:

First of all, all resolutions were done by poll, and the detailed voting is announced, that is very transparent.

Secondly, the 5th resolution was not passed, which means that See Teow Koon was not re-elected.

Thirdly, it can be seen that quite a few other resolutions (in red) had tens of millions of votes (shares) against them. Although these resolutions did pass, the opposition has been noticed.

Bursa Stock Talk wrote an interesting posting on his blog, whether Can One should be allowed to vote on the asset disposal or not. These kind of asset disposals have to be approved by 75% of the votes, which could make it interesting.